Larry Catá Backer's comments on current issues in transnational law and policy. These essays focus on the constitution of regulatory communities (political, economic, and religious) as they manage their constituencies and the conflicts between them. The context is globalization. This is an academic field-free zone: expect to travel "without documents" through the sometimes strongly guarded boundaries of international relations, constitutional, international, comparative, and corporate law.

Wednesday, February 01, 2017

On Governmental Use of Shareholder Power Through Sovereign Wealth Fund Investment: Thoughts on Norway's Ethics Council Recommendation of Revocation of Exclusion of Raytheon From the Government Pension Fund Global

The Secretariat of the Norwegian Pension Fund Global has just circulated
the recommendation, taken in August 2016 by the Norwegian Ethics Council, to
revoke the exclusion of Raytheon Company from the Government Pension Fund Global.

The unofficial English translation follows and may also be accessed HERE.

The revocation suggests both the strengths and weaknesses of current forms of state use of their shareholder power where they seek to implement national and international norms of corporate governance and the responsibility to respect human rights and pursue goals of sustainability and avoidance of corruption. Brief Comments follow.

On its face, the Ethics Council's recommendation does not appear to suggest much that is out of the ordinary course. But there are two exceptions that are worth further consideration. The first is the curious language used to describe the way that knowledge of Raytheon's change in product universe was communicated. It is possible to read the Recommendation as suggesting that Raytheon never bothered to notify the Ethics Council (and there was certainly no legal obligation for it to do so). That might also suggest the disinterest of Raytheon in lifting the exclusion. If that is the case, that should be worrisome for the political project of the Fund--or perhaps better put, a signal of the scope of the influence of the Fund relating to its ability to affect the price of capital of excluded companies (and thus the effectiveness of exclusion as a tool).

The second is the curious language used by Raytheon's lawyers to answer the Ethics Council's query. The most important part of Raytheon's response was not what it had done (something already on its web site and readily available worldwide. Rather it was on the hedging language that came before the confirmation of its website statements ("While we cannot provide detailed responses on specific products and
customers due to legal constraints and customer relations issues and
other policy considerations"). This is good lawyer language, to be sure; it be be less satisfactory to a large institutional investor thinking about taking a potentially substantial equity position in the company. The dissatisfaction does not arise from Raytheon's unwillingness to disclose information that might negatively impact its contractual obligations and market calculations; rather it should come from the unwillingness to disclose or point to those "issues" and "policy" on which it bases its nondisclosure stance. A company that is already this unwilling to be transparent at the most general level is one that might be more difficult to embed within a system of investment grounded in the application of principle some of which Raytheon already has a history of dismissing as unimportant to its own business. One should keep that in mind when, perhaps inevitably, the Council will have to consider whether future action might require observation or exclusion yet again.

Both of these observations produce a third, and perhaps the most ambitious. It has become clear over the course of the last half century that--whether in the context of managing markets in securities by states, or incorporating soft law provisions into corporate governance--disclosure and transparency appear to play a vital role (e.g. here). That is an insight that ought not to be lost on the managers of the Norwegian Pension Fund Global. In their case it speaks to the potential and the under-utilization of the observation status mechanisms with which it has been empowered. Observation status provides the Pension Fund Global with the ability to monitor companies, and in that way to more effectively employ their shareholder power in an institutionally powerful way. For enterprises that see a value in inclusion within the Pension Fund Global investment universe, observation status also provides a necessary incentive to submit to monitoring, an incentive that might be related to its costs of capital. There is something less than positive to see in the Ethics Council little more than a small group within a powerful Fund that must go chasing about for information of companies. A greater use of the observation mechanism might provide a useful means of developing processes for the receipt of information that is specifically tailored to the needs of the Fund--and to the fulfillment of its public mandate. But the suggestion here isn't merely for the more aggressive use of the observation status power. rather it is the intuition that observation stratus itself might be built into the everyday activities of the Pension Fund Global as a shareholder. That is, that the essence of observation--the acquisition of targeted information on which judgement about an enterprise with respect ot spec ific conduct can be made--would make the mandate of the Pension Fund Global much easier to fulfill and more effectively so.

The Council on Ethics recommends revoking the exclusion of Raytheon Company («Raytheon») from the Government Pension Fund Global. The company has been excluded since 2005 due to its production of cluster munitions. This activity has ceased, and there are no longer grounds to maintain the exclusion of the company.

2. Background

The Council recommended the exclusion of Raytheon in 2005 on the grounds of the company’s production of cluster munitions.1 The exclusion of the company has been upheld until now.

In accordance with section 5(5) of the Guidelines for observation and exclusion from the Government Pension Fund Global, the Council may, in light of new information, recommend that the Bank revoke an exclusion decision.

3. Information from the company

Raytheon has issued the following statement on its website:

«Raytheon does not manufacture or sell cluster munitions (as defined in the 2008 Convention on Cluster Munitions), land mines, nuclear warheads, or biological or chemical weapons.»2

The company confirms this in an email to the Council:

«While we cannot provide detailed responses on specific products and customers due to legal constraints and customer relations issues and other policy considerations, we can still state that Raytheon does not manufacture or sell cluster munitions, nuclear warheads, biological or chemical weapons.»3

4. The Council on Ethics’ assessment

On the basis of the information referred to above, the Council finds that there are no longer grounds to maintain the exclusion of the company.

5. Recommendation

The Council on Ethics recommends to revoke the exclusion of Raytheon Company from the Government Pension Fund Global.

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All essays are (c) Larry Catá Backer except where otherwise noted. All rights reserved. The essays may be cited and quoted with appropriate reference. Suggested reference as follows: Larry Catá Backer, [Essay Title], Law at the End of the Day, ([Essay Posting Date]) available at [http address].

The author holds a faculty appointment at Pennsylvania State University. Notice is hereby given that irrespective of that appointment, this blog serves as a purely personal enterprise created to serve as an independent site focusing on issues of general concern to the public. The views and opinions expressed here are those of its author. This site is neither affiliated with nor does it in any way state, reflect, or represent the views of Pennsylvania State University or any of its entities, units or affiliates.

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Globalization Law and Policy Series from Ashgate Publishing

Globalization: Law and Policy will include an integrated bodyof scholarship that critically addresses key issues and theoretical debates in comparative and transnational law. Volumes in the series will focus on the consequential effects of globalization, including emerging frameworks and processes for the internationalization, legal harmonization, juridification and democratization of law among increasingly connected political, economic, religious, cultural, ethnic and other functionally differentiated governance communities. This series is intended as a resource for scholars, students, policy makers and civil society actors, and will include a balance of theoretical and policy studies in single-authored volumes and collections of original essays.

An interview with the Series EditorQueries and book proposals may be directed to:Larry Catá BackerW. Richard and Mary Eshelman Faculty Scholarand Professor of Law, Professor of International AffairsPennsylvania State University239 Lewis Katz BuildingUniversity Park, PA 16802email: lcb911@gmail.com

About Me

I hope you enjoy these essays. Each treats aspects of the relationship between law, broadly understood, and human organization. My essays are about government and governance, based on the following assumptions: Humans organize themselves in all sorts of ways. We bind ourselves to organization by all sorts of instruments. Law has been deployed to elaborate differences between economic organizations (principally corporations, partnerships and other entities), political organization (the state, supra-national, international, and non-governmental organizations), religious, ethnic and family organization. I am not convinced that these separations, now sometimes blindly embraced, are particularly useful. This skepticism serves as the foundation of the essays here. My thanks to Arianna Backer for research assistance.